I think that BMW at ~€80/share is undervalued. There are multiple ways to think about this but in a nutshell BMW has ~€20/share in net cash and has EPS of approximately ~€10, for a trailing PE of ~8x and ~6x net of cash. BMW’s bank has earned well above its cost of capital for a long period of time and accounts for another ~€15/share of value (at book). Excluding the cash and financial division equity, the core automotive business sells for a little over ~2x EBITDA (understanding that EBITDA is a near worthless metric with automotive companies).
The preferred shares trades around ~€69 so are priced at about one turn less on each metric. Many investors favor the preferred but since those shares will do well if the common does well I’m writing about the common here.
Alternatively, another way to think about this is that BMW has a market cap of ~€52bn and a tangible book value of ~€43bn. The majority of this TBV consists of the bank and net cash (~€24bn), so arguably one is paying ~€28bn for the car company which has ~€19bn in tangible equity and earned ~€7-8bn in EBIT last year. Just the brand BMW was recently valued as the 11th most valuable brand in the world, worth $41bn (Interbrand), and this is of course on the balance sheet for nothing.
All car companies trade at low multiples, as they probably should when global SAAR is already high, the traditional car business has headwinds, and the industry is cursed with terrible economics. BMW has its own unique headwinds which are significant (punching inventory to US dealers, too many cars on the lots, Benz models more stylish, 7-series design is a bust, upcoming R&D requirements for a multitude of near-mandatory developments, Tesla competing with German luxury, etc.). I think that these are extremely legitimate concerns and do not in any way push them aside as risks.
However, within auto OEMs I believe there is only one legitimately good business model - having some “sticker” which costs nothing but makes the car ~$3k-300k more valuable. To varying degrees I believe the valuable stickers are Benz, BMW, Audi, Porsche, Ferrari, Tesla and a few others. This is well known in the car business where luxury car companies produce a small minority of the cars; employ a very small proportion of the total capital; and make the large majority of the industry’s profit.
I will not call BMW a compounder but below is their ROE since 2002, which has normally been in the mid-high teens despite having excess cash on their balance sheet. It is un-controversial that their principal intangible asset (brand) is huge, and perhaps for this reason the business in the recent past has only traded materially below its tangible book value in 2008-2009.
ROE Since 2003
